Due to long standing relationship with your firm, the supplier has agreed to giv

Question

Due to long standing relationship with your firm, the supplier has agreed to give you quantity discounts based on the number of units you procure from them. The ordering cost of the product is $4000 per order. The inventory carrying cost is $25 per unit per year. The annual demand for the product is estimated as 100,000 units.


The quantity discounts are 1 to 6000 units are $1500 per unit, 6001+ units are $1200 per unit.


What is the total cost for ordering this product from your supplier at optimal quantity?

Select one:

a. $150,141,421

b. $150,197,653

c. $180,176,792

d. $120,141,668

e. None of the above

Explanation / Answer

Annual demand, D = 100,000

Ordering cost, S = 4000

Inventory carrying cost, H = 25

Economic order quantity, Q = (2DS/H) = (2*100000*4000/25) = 5657

For this quantity, applicable price, P = 1500

Total annual cost for ordering, inventory carrying and purchase = (D/Q)*S + (Q/2)*H + D*P = (100000/5657)*4000 + (5657/2)*25 + 100000*1500 = $ 150,141,421

For Q = 6001, total annual cost = (100000/6001)*4000 + (6001/2)*25 + 100000*1200 = $ 120,141,668

Lowest cost (120,141,668) is associated with Q = 6001.

ANSWER: d. $120,141,668

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.